FAST RETAIL-DRS's overseas business has grown significantly, focusing on "downstream markets" as a new highlight for Uniqlo?

Zhitong App learned that on January 12th, the stock price of FAST RETAIL-DRS (06288), the parent company of Uniqlo, rose sharply, reaching a maximum increase of over 5% during trading hours. As of the time of writing, the stock price has increased by over 3%. According to the financial report released by FAST RETAIL-DRS on January 11th, in the first quarter of the 2024 fiscal year, FAST RETAIL-DRS recorded a revenue of approximately JPY 810.8 billion (approximately RMB 39.9 billion), a year-on-year increase of 13.2%. The operating profit was approximately JPY 146.7 billion (approximately RMB 7.2 billion), a year-on-year increase of 25.3%. The net profit during the period was approximately JPY 114.7 billion (approximately RMB 5.6 billion), a year-on-year increase of 27.7%. The net profit attributable to the parent company's owners was JPY 107.8 billion, a year-on-year increase of 26.7%.

The significant improvement in the performance of FAST RETAIL-DRS in the first quarter of the 2024 fiscal year was mainly due to the rapid recovery of Uniqlo's sales in the Chinese market, which drove the sales and profits of its overseas business to increase significantly. It is reported that currently, Uniqlo's sales in China account for more than 40% of its overseas business. In addition, the slowdown in the depreciation of the Japanese yen during the quarter also relieved the pressure of rising procurement costs for FAST RETAIL-DRS.

FAST RETAIL-DRS stated that the overseas UNIQLO business segment has become a growth pillar of the group. During the reporting period, overseas Uniqlo contributed revenue of JPY 441.3 billion (approximately RMB 21.7 billion), a year-on-year increase of 23.3%, accounting for approximately 54% of the group's total revenue. The operating profit was JPY 77.8 billion (approximately RMB 3.8 billion), a year-on-year increase of 35.8%, accounting for approximately 53% of the group's total operating profit.

According to the financial report, in the 2023 fiscal year, Uniqlo's sales in the Greater China region increased by 15.2% year-on-year, and operating profit increased by 25.0%, achieving significant growth in both revenue and profit. Uniqlo has also announced its future business plan: Uniqlo plans to open 80 to 100 new stores in China every year, with more than half of them located in third- and fourth-tier cities. This marks Uniqlo's entry into the "lower-tier market".

Industry experts believe that compared to local brands in third- and fourth-tier cities, Uniqlo has advantages in terms of style, product range, and cost-effectiveness. The entry of international brands into the lower-tier market is actually a "downward blow" to local brands. The reason why Uniqlo opens new stores in third- and fourth-tier cities is because it sees the purchasing power of these lower-tier cities, which is actually the core of the Chinese market. Uniqlo's PR Director in China, Dong Chunfang, previously stated to the media that in the past, Uniqlo focused more on global flagship stores in the Chinese market. Now, Uniqlo also wants to explore incremental opportunities beyond first-tier cities. New second-tier cities are the regions that Uniqlo wants to continue to deepen its presence in, and regional flagship stores are important store formats for expansion. Uniqlo's Chief Marketing Officer for Greater China, Wu Pinhui, previously mentioned that Uniqlo will also expand into many third- and fourth-tier cities.

In addition, Uniqlo's parent company, FAST RETAIL-DRS, is also accelerating its expansion in the European and American markets. Ken Gokazaki, Executive Director and CFO of FAST RETAIL-DRS, stated at the 2023 fiscal year performance meeting that FAST RETAIL-DRS will accelerate the pace of opening stores in North America and Europe, with 20 and 10 new stores respectively each year.

Looking at the entire fast fashion industry, apart from Uniqlo's continued growth, many international fast fashion brands such as H&M and ZARA have been retreating and adjusting in the Chinese market in recent years. Data shows that as of November 30, 2022, the total number of stores under H&M Group's brands was 4,465, a decrease of 336 compared to the same period in 2021. From 2019 to 2021, ZARA had 179, 141, and 133 stores in the Chinese market, respectively.

On the other hand, Chinese fast fashion brands are making efforts and rising strongly. Among them, the most representative brand is URBAN REVIVO (UR), which focuses on local innovation, cutting, design, and other concepts, and has been developing rapidly. UR has also started a global strategic layout, opening offline fast fashion clothing stores in Singapore, Thailand, London, and other places, with nearly 400 stores worldwide. From June to August 2022, UR's official flagship store saw a sales increase of about 30% in both revenue and volume, while ZARA's sales during the same period declined by as much as 40%.

In October last year, Goldman Sachs raised its forecast for FAST RETAIL-DRS's operating profit for the next two years by 6% each, believing that its business model is competitive and its growth potential is not fully reflected in the stock price. The bank pointed out that FAST RETAIL-DRS's profit performance in the past few years reflects diversified contributions from overseas, from China to Southeast Asia, and then to Europe and America. The future growth focus is in Europe and America, and the company's business model is based on affordable prices for customers and providing high-quality basic clothing. It is believed to be one of the few brands with significant overseas business growth.